Could Turkey’s central bank surprise markets this month?

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This Thursday, Turkey’s new central bank governor Erdem Basci will chair his first monetary policy meeting. What can we expect from the man who is seen now as the architect of the country’s novel monetary policy? Most analysts predict there will be no change this month to interest rates and banks’ reserve requirement ratios. But could the bank, which shocked markets with an out-of-the-blue rate cut in December and a big further rise in short-term RRRs last month, throw another curveball?

ING Bank is among those which believes the central bank could again surprise markets this week. Using Turkish banks’ net off-balance sheet currency positions as a proxy, ING analyst Sengul Dagdeviren reckons short-term capital inflows are on the rise again. Banks’ net off-balance sheet FX positions had halved between Nov 5 to March 4 to just over $12 billion, as the central bank drastically widened the gap between the overnight borrowing and lending rates — a move that discouraged short-term swap positions. But these positions have risen back over $21 billion in the month to 8 April, Dagdeviren says, noting this coincides with a 5 percent gain in the Turkish lira against the dollar.

“Given the (central bank’s) strong stance against short-term inflows and strong lira, the chances of seeing CBT action on the FX side in the 21 April meeting have increased,” ING tells clients, suggesting the bank could choose to apply reserve requirements on short-term swap transactions or raise the RRRs on banks’ hard currency reserves.

If that happens, it will enrage the banking sector further. Count stocks, FX and bonds to start move south again.